NEW YORK (CNNfn) - The U.S. economy grew in the second quarter at the weakest pace in more than eight years, the government reported Wednesday, but avoided falling into negative territory, easing fears that the world's largest economy could be in a recession.

U.S. gross domestic product (GDP) -- the broadest measure of the nation's economy -- grew at a 0.2 percent annual rate in the quarter, the Commerce Department reported. It was the government's first revision of second-quarter GDP, compared with its initial estimate of 0.7 percent growth. Economists surveyed by Briefing.com expected GDP to come in flat.

If GDP had been flat or negative, it would have raised fears that the economy was in a recession, technically defined as two consecutive quarters of negative GDP.

"We're not in a recession. We're not going to be in a recession. Recovery is on the horizon. The decks are clear. The economy is in direct drive," said Paul Kasriel, chief domestic economist at Northern Trust Co.

Still, GDP was the weakest since it shrank at a 0.1 percent rate in the first quarter of 1993, and the number will be revised once more Sept. 28, so there's still a possibility it could be negative.

"The number was a little higher than expected. I think the market will like it, but we are still talking about no growth here, and the trend is clearly down," said Robert Macintosh, chief economist and portfolio manager at Eaton Vance Management. "The market is going to interpret this at first favorably, but a more rational interpretation is that it is pretty darn weak."

After initially reacting favorably to the news, U.S. stock markets fell, as investors got little reassurance from the report that corporate profits would rebound soon. U.S. Treasury bond prices recovered from earlier losses.

The Federal Reserve has slashed its target for short-term interest rates seven times this year, from 6.5 percent to 3.5 percent, in an effort to keep money flowing through the economy and avoid a recession.

Though second-quarter GDP was better than expected, it's a backward-looking number, and the Fed could be concerned enough about future weakness to cut rates again at its next meeting, scheduled for Oct. 2, Ethan Harris, senior economist at Lehman Brothers, told CNNfn's Before Hours program. [390K WAV] or [390K AIF]

Economists expected the second-quarter GDP estimate to be revised lower after negative reports earlier this month on the trade deficit and business inventories, two components of the GDP figure.

Sure enough, inventory reduction took 0.4 of a percentage point from the GDP figure, and falling exports took another 0.3 of a percentage point, offsetting gains in other areas of the economy.

Still, much of the overall weakness in the second quarter came from companies cutting back sharply on their investment in plants and equipment. Inventory reduction is the first step in helping the beleaguered manufacturing sector increase production again.

"The decline in inventory suggests that production will start to ramp up and should lead to a pick up in growth going forward," Merrill Lynch economist Gerald Cohen said.

However, Manufacturers Alliance, an Arlington, Va.-based manufacturing group, said in its quarterly report Wednesday that U.S. factories may have a long way to go to reduce inventory levels to match demand.

Though manufacturers cut 2.5 percent from inventory between January and June, they still had 1.4 months' worth of goods on their shelves in June, unchanged from January.

"The fact that manufacturing inventories levels are currently only 2.5 percent off their peak and that inventory liquidations generally persist long after industrial production has begun to rebound suggest that more inventory paring is likely," the group said.

Battered by weak sales and plunging profits, U.S. companies reduced capital spending in the second quarter at a 14.6 percent rate, the worst showing since the second quarter of 1980. The new estimate was weaker than the 13.6 percent rate of decline previously estimated.

Wednesday's report also showed after-tax profits of U.S. corporations fell by 2 percent in the second quarter, following a 7.8 percent decline in the first quarter.

Consumers were the major force keeping the country out of recession. Consumer spending, which accounts for two-thirds of total economic activity, rose at an annual rate of 2.5 percent in the second quarter, stronger than the 2.1 percent rate originally estimated.

Also helping was a 5.8 percent rate of increase in residential construction, a sector that has remained strong, helped by falling interest rates.

Meanwhile, a key inflation gauge tied to the GDP rose at a rate of just 1.6 percent in the second quarter, half the 3.2 percent rate in the first quarter. The report is the latest confirmation of the Fed's confidence that inflation is not a risk, leaving it free to continue to keep money flowing through the economy by cutting interest rates. -- from staff and wire reports